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Why Value, and Why Now?

By Mike Rode, CFA

Key Takeaways

Value stocks are gaining momentum due to higher inflation and interest rates, driven by factors like COVID-19 stimulus, reshoring and the housing market. Historical data shows that value outperforms growth in such conditions.

Value stocks currently offer attractive valuations compared to large growth stocks, with a significant spread between the two. Valuation is an important consideration, especially heading into a potential recession.

Dividends play a crucial role in total returns, particularly during periods of lower price returns. With a potentially higher cost of capital in the future, safe and sustainable dividend income is vital for consistent returns.

After nearly a decade of outperformance for growth stocks, fueled by low inflation and near-zero interest rates, value stocks staged a comeback in 2022, outperforming by 20%.

Nearly halfway through 2023, growth leads value by more than 15% with the tech-heavy Nasdaq Stock Market up nearly 20%.

Why should investors maintain and possibly increase exposure to value?

Top Five Reasons for 'Why Value Now'

1. Higher inflation and interest rates.

The days of low inflation — almost deflation — and zero interest-rate policy (ZIRP) are likely finished. Why?

  • COVID-19 stimulus amounted to nearly 30% of GDP, which is the largest amount since the New Deal during the Great Depression. This surge in money supply will likely keep inflation persistently high for years to come.

  • Labor shortages will likely keep wage inflation high as the emerging trend of companies bringing their supply chains back to the U.S. (aka reshoring) continues to create jobs.

  • The housing market will likely remain tight because of a lack of supply and demographic trends like millennials buying houses at an accelerating rate. Housing-related categories account for more than 40% of the CPI, which will likely keep inflation well above the Fed’s target of 2%.

  • Value has historically outperformed growth during periods of higher inflation and higher interest rates.

2. Attractive valuations.

  • Value stocks are trading below historical valuation levels while large growth stocks are more than 20% above average.

  • The spread between value and growth remains near 20-year highs.

  • Valuation should never be “the” thesis, but it is an important starting point, especially heading into a potential recession.

Figure 1 | Value Stocks Are Trading Below Historical Levels

Valuations as of 4/30/2023.

Data from 12/31/1997 to 4/28/2023. Past performance is no guarantee of future results. Source: FactSet

3. Dividends.

  • Over the last 80 years, dividends have represented 35% of total returns from the S&P 500.

  • In decades of lower price returns, like the 1970s as inflation and interest rates surged, or the 2000s after the tech bubble burst, dividends were key by offsetting weakness and protecting principal when price returns were negative.

  • Higher cost of capital may diminish price returns going forward, so safe and sustainable dividend income will be vital to achieving consistent returns.

Figure 2 | Dividends Have Represented a Large Portion of Total Returns

S&P 500: Dividends' Contributions to Total Return by Decade

S&P 500: Dividends' Contributions to Total Return by Decade

*Note that the 2000s had negative total return, dividends provided 1.8% over the decade. Performance in USD.
Source: Morningstar.

4. Defense wins championships.

  • Downside protection is key to safeguarding and building wealth over time.

  • A 10% loss requires an 11% gain to break even. A 50% loss requires a 100% gain to break even.

  • Value provides more than double the exposure to sectors that can provide downside protection, and dividends, in recessionary markets like consumer staples and utilities.

  • There is no shortage of risks in today’s markets. Interest rate hikes and quantitative tightening, the likes of which markets have not seen in more than 40 years, created unintended consequences, including the regional bank crisis and the cryptocurrency meltdown.

  • Geopolitical risks persist, including the Russia-Ukraine war, tension between China and Taiwan and an increasingly unstable Middle East.

  • American Century sees a 70% probability of a recession and a 25% chance of stagflation over the next six months. Defense via downside protection and lower volatility will likely be critical components to successfully navigating these challenging environments.

5. History and academic research.

  • Nobel prize-winning research from Eugene Fama and Kenneth French proved that over time, value stocks outperform and create more wealth than growth.1

  • Over the last 20 years, even including the decade of growth’s dominance, high-quality value has been the style with the highest returns and the lowest risk.2

  • Empirical evidence shows that during both recession and stagflation — a combined 95% probability over the next six months, according to American Century — quality is one of the best-performing factors in both growth and value.3

Figure 3 | High-Quality Value Has Outperformed With Lower Risk

MSCI World: Annualized Return compared to MSCI World: Annualized Volatility.

Data from 1/31/2002 to 12/31/2022. Past performance is no guarantee of future results. Universe: MSCI World Index.
Source: American Century Investments, FactSet.

Mike Rode, CFA
Mike Rode, CFA

Vice President

Senior Investment Director

Explore More Insights

Eugene F. Fama and Kenneth R. French, “Value versus Growth: The International Evidence,” Journal of Finance, December 1998.

Source: American Century Investments’ research, FactSet, MSCI.

Source: American Century Investments’ research.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.